Government Contractors
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Industry Overview
The US federal government each year spends about $560 billion to buy goods and services, including $260 billion for Medicare, $160 billion for defense, and $110 billion for nondefense items. Though it is difficult to determine exactly how much state and local governments spend on contractors, approximately $300 billion is spent annually by state and local governments on capital projects, such as highways, bridges, and public buildings, in which contractors are typically involved. Further, spending varies widely by state and municipality, with a large state like California spending up to $35 billion on contractors annually.
Government contractors include large corporations, like Lockheed Martin, Boeing, and Northrop Grumman; academic institutions, like the University of California and California Institute of Technology; healthcare companies, like AmerisourceBergen; and tens of thousands of smaller companies.
The government contracting industry is highly fragmented, but at the federal level is concentrated at the top: the 100 largest federal contractors receive about 60 percent of procurement dollars. Efforts to help smaller firms compete for federal contracts are under way.
Competitive Landscape
Demand is driven by the expanding needs of governments and the trend toward outsourcing. The profitability of individual contracts depends on efficiency, because most contracts have a fixed price. Large companies have advantages in getting large contracts and may have greater expertise in the contracting process, but small companies can compete successfully for most contracts by offering the lowest price. Although some government contracts can be handled only by large companies, small companies can be very competitive by supplying specialized products or services, or by working as subcontractors. Some programs set funds aside specifically for small businesses.
Products, Operations & Technology
Government purchasing falls into two main categories: acquisition and procurement. Acquisition is when an agency figures out what it needs, then builds a strategy for purchasing. Procurement refers to the contracting portion of purchasing: an agency requests proposals, evaluates them, and awards a contract.
In addition to supplying ordinary administrative goods and services, commercial vendors provide governments with specialized goods and services such as consulting, IT, research, construction, weapons, and medical care. Different levels of government have different commercial needs. Local governments contract mainly for construction and waste management services. State governments spend heavily on construction; consulting; medical services (Medicaid); and information systems. The federal government uses commercial vendors most heavily for defense, medical services, consulting, R&D, and information systems.
Aside from Medicare, the federal government contracts with commercial vendors for about $215 billion of goods and services through procurement contracts issued by some 60 executive departments and agencies. The largest amounts are contracted by the Department of Defense (DoD); Department of Energy (DOE); Department of Veterans Affairs (VA); and the US Postal Service (USPS). Although contracts and purchases must usually be awarded to the lowest qualified bidder, various programs that favor small, disadvantaged, and woman-owned businesses are administered through the Small Business Administration (SBA). Overall, 23 percent of procurement dollars go to small businesses, 70 percent to large ones, and the rest to nonprofits, foreign contractors, and other vendors.
